Spring 2009 Cabrillo College- CEM 1621

Energy Economics

� Economic analyses- what are they?– Decision making tools

– Techniques used to select “best” option

– Typically don’t include non-economic benefits

� Effect on environment

� Effect on society

– Range from simple to complex

– Involve a range of assumptions

– Can involve “complex” (??) math and computer modeling

Spring 2009 Cabrillo College- CEM 1622

Types of Economic Analyses

� Simple Payback (SP)

� Life Cycle Cost (LCC)

� Return-on-Investment (ROI)

� Internal Rate of Return (IRR)

� Net Present Worth (NPW)

� Savings-Investment Ratio (SIR)

ALL OF THE ABOVE---MOSTLY ECONOMIC COST ONLY !!!

� Environmental Life Cycle Assessment (LCA)

Spring 2009 Cabrillo College- CEM 1623

Project Assumptions are Key!!

� Define the project and state the objectives

� Analyze first cost

– Materials

– Equipment

– Installation labor

– Taxes

– Rental costs

– Other costs? (permits, rigging, etc)

Spring 2009 Cabrillo College- CEM 1624

Assumptions are Key!!

� Analyze operating costs

– Hours of operation?

– Establish energy costs

� Natural gas- $ 0.85/therm ??

� Electrical- $ 0.17/kwh ??

� Analyze maintenance costs

� Tax credits/rebates available ??

� Cost of money/inflation ??

Spring 2009 Cabrillo College- CEM 1625

Simple Payback

� Should be used as 1st-step to differentiate viable options.

� Unfortunately…is used for decision-making even though it is an incomplete analysis

Simple Payback = First Cost Difference

(years) Operating/Maintenance $$ Savings

CAUTION: Does not account for cost of money or for length of project!!

Spring 2009 Cabrillo College- CEM 1626

Simple Payback

Refrigerator example:

� Assumptions:

– Initial cost:

� EnergyStar brand- $ 900

� “Standard” unit- $ 870

– Operating cost: (based on $ 0.17/kWh)

� EnergyStar brand- 556 kWh/year; $ 98.41/year

� “Standard” unit- 695 kWh/year; $ 123.02/year

www.epa.gov/energystar/purchasing- “Savings Calculator”

Spring 2009 Cabrillo College- CEM 1627

Simple Payback

Refrigerator example: (cont.)

� Simple Payback (yrs) = Initial Cost Difference

Operating Cost Savings

= ($ 900 – 870)

($ 123.02 – 98.41)

= $ 30

$ 24.61

= 1.21 years

Spring 2009 Cabrillo College- CEM 1628

Simple Payback

� Water Heater Example:

– Natural Gas vs. Electric �� WHICH IS BEST?

– Operating costs (www.pge.com)� NATURAL GAS- $ 0.80/THERM; $ 195/year

� ELECTRICITY- $ 0.17/THERM; $ 952/year

– Initial costs (www.grainger.com)

� NATURAL GAS- $ 405

� ELECTRIC- $ 168

Spring 2009 Cabrillo College- CEM 1629

Simple Payback

� Water Heater Example: (cont.)

Simple Payback (yrs) = Initial Cost Difference

Operating Cost Savings

= ($ 405 – 168)

($ 952 – 195)

= $ 237

$ 757

= 0.31 years (4 months!!)

� What’s missing??

Spring 2009 Cabrillo College- CEM 16210

Simple Payback

� Installation cost difference:

– Gas flues

– Combustion air

– Gas piping cost vs. electrical wire cost

– Labor costs

– Roof/wall cutting, patching and painting

� Permits

� Title 24 effect ??

� Downtime

� Availability/delivery

� Maintenance cost difference ??

Spring 2009 Cabrillo College- CEM 16211

Life Cycle Cost (LCC)

� LCC represents TOTAL cost of owning, operating and maintaining over useful life.

� Costs are adjusted for the time value of money (i.e. inflation, interest rates, cost of $$ are included)

� Alternative with LOWEST LCC is the most attractive alternative.

� Method of choice for FEMP/DOE projects

Spring 2009 Cabrillo College- CEM 16212

Life Cycle Cost Analysis

Spring 2009 Cabrillo College- CEM 16213

Life Cycle Cost (LCC)

� Basic steps in analysis:– Identify feasible alternatives

– Establish assumptions and parameters

– Specify and estimate costs ($$$)

– Discount costs to present values

– Compute LCC for each alternative

– Select alternate with lowest LCC

� Add narrative describing non-monetary costs and savings (i.e. environmental costs, societal benefits)

Spring 2009 Cabrillo College- CEM 16214

Life Cycle Cost (LCC)

� Establish Assumptions/Parameters– Length of study period

– Length of planning/construction period

– Cost of $$$ (discount rate)

– Inflation rate

– Energy costs ($$/kWh, $$ therm, $$/gallon)

– Operational assumptions� How often will system or equipment operate ?

� When will equipment need to be replaced ?

Spring 2009 Cabrillo College- CEM 16215

Life Cycle Cost (LCC)-Specify/Estimate Costs:

– Initial investment costs (“first costs”)

– Future costs

– Capital replacement costs during study life

– Resale/residual value at end of study period

– Disposal costs

– Operating, maintenance and repair costs

– Energy costs

– Water costs

– Taxes

– Rebates/tax credits

– Non-Monetary costs

Spring 2009 Cabrillo College- CEM 16216

Life Cycle Cost Analysis

Spring 2009 Cabrillo College- CEM 16217

Life Cycle Cost (LCC)

� Discount costs to Present Value (PV)

PV = Ft

(1 + d)t

where: Ft = cost or savings in future year t

d = discount rate (i.e. cost of $$)Example:

� Find PV of $ 5,000 item if it is to be replaced 8 years in future with discount rate of 3.2% =

PV = 5000/(1.032)8 = 5000/1.2866 = $ 3,886

Spring 2009 Cabrillo College- CEM 16218

Life Cycle Cost (LCC)-Present Value Examples (cont.)

� Example: Find present value of operating and maintenance cost ($3,500) that will be the same annual cost for life of study (15 yrs) except for cost of inflation (3.2%).

PV = 3500[(1 + 0.032)15 -1 ] = 3500(0.604) = 3500 x 11.77 = $41,195

0.032(1 + 0.032)15 0.0513

� Example: Fluctuating base annual energy cost of $12,000/year with inflation rate of 5%, discount rate of 10% and 20 year study life

Effective interest rate = (0.10 – 0.05)/(1 + 0.05) = 0.0476

PV = 12,000[(1 + 0.0476)20 – 1] = 12000(2.5346 – 1) = 18,415

0.0476[1 + 0.0476]20 0.0476(2.5346) 0.121

PV = $ 152,190

Spring 2009 Cabrillo College- CEM 16219

Present Value Factors

Spring 2009 Cabrillo College- CEM 16220

Life Cycle Cost Analysis

� For building related projects:

LCC = I + Repl – Res + E + W + OM/Rwhere: (ALL COSTS EXPRESSED IN PRESENT VALUE)

LCC = total LCC of given alternative

I = initial investment cost

Repl = replacement cost during life of study

Res = residual (resale) value at end of life less disposal costs

E = energy costs

W = water costs

OM/R = non-fuel operating, maintenance and repair costs

Spring 2009 Cabrillo College- CEM 16221

Life Cycle Cost (LCC)

� Energy Modeling & Economics– “DOE2” Energy Modeling

� Used to model large commercial/industrial buildings

� www.doe2.com/eQuest/index.html

� $ 300 - $2,000 cost

– “Energy 10” Energy Modeling� Applies to small commercial/residential buildings

� Easier to use/less expensive than DOE2

� www.nrel.gov/buildings/energy10

� $ 250 cost

Spring 2009 Cabrillo College- CEM 16222

Life Cycle Cost Analysis

� Energy Modeling & Economics– NIST (National Institute of Standards and Technology)

� “BLCC5” - (Building Life-Cycle Cost Program)– Updated every April

� “BEES” - (Building for Environmental and

Economic Sustainability)– Analyzes BOTH economic and environmental

considerations

� www.bfrl.nist.gov/oae/software/bees.html

– Athena Institute: “Environmental Impact Estimator”

� www.athenaSMI.ca